Avon Finally Finds An Investor In Cerberus Capital With A $605 Million Deal

On December 17th, Avon Products (NYSE:AVP) entered into an alliance with the private equity management firm, Cerberus Capital Management.  The transaction entails Cerberus investing $435 million into Avon and carving Avon’s North American division into a separate entity by investing another $170 million in it. Avon sold 80.1% of its North American business to Cerberus. According to Avon’s CEO Sheri McCoy, the company will now strengthen focus on its international business from where it generates over 85% of its revenues.  There will be some changes in board members, as well. Five of Avon’s directors will be replaced and the company’s chairman will also be replaced by a Cerberus representative. There will also be two more Cerberus officials on Avon’s 11-person board. Also, after the completion of the transaction, Cerberus might own 16.6% of Avon’s stake, in addition to the 80.1% stake in Avon North America. This might leave Avon’s current CEO, Sheri McCoy’s position in a vulnerable state. ^{[1] [2]}

OurTrefis price estimate for Avon is $2.83.

See Our Complete Analysis for Avon Products Here

What Happened To Avon?

Avon has been on a downhill journey since 2011 (its last profitable year) as its direct selling model continued losing market share to retail outlets and online shopping. The company appointed a new CEO in 2012, to turn around its situation. Even then, nothing seemed to have worked for the company. Avon’s annual sales had declined by 25% since 2011 and its share price, too, fell by 81% during the same period. ^[2] Read more about how Avon’s resistance to adapting to the current times, led to its downfall, here.

The Avon North America president, Pablo Munoz, will be relieved from his duty in January 2016. Many more officials recruited by Ms. McCoy to help in the revival of the company will also be replaced. Whether Avon’s current CEO will continue in her position will be better known on January 21 when Ms. McCoy is supposed to present Avon’s growth strategies to its investors.

Background

Over the last few months, Avon had been in talks with private equity firms to sell off either a part or whole of its business. There was news that the company was discussing deals with Cerberus Capital Management LP and Platinum Equity LLC. These private equity firms specialize in distressed investing and the deal that they were allegedly considering is called Private Investment in Public Equity (PIPE). This is considered a backup option when a full sale for a company seems difficult. ^[3]

It took a long time for Avon to get a buyer because the company had been constantly losing value. Over the last one year, Avon’s market price declined by ~60% and the company’s direct selling model failed to impress the beauty users of today who are used to conveniences such as digital shopping and travel retail. Additionally, Avon’s representative base had been witnessing constant attrition especially in markets where economic revival is creating permanent jobs, which employees prefer to the contractual representative jobs. Recently, Avon’s debt management had turned risky and its current assets were not sufficient to meet its short term liquidity needs. ^[4]

Avon’s Troubles In North America

Avon had been struggling with its North America business over the last couple of years. This was mostly due to the continued erosion in the representative base. In 2014, North America experienced a 17% constant dollar decline in revenues and an 18% decline in the active representative base. North America contributes around 15% to Avon’s net sales. ^[2] Avon had nearly 470,000 representatives in North America in 2009, which declined to 258,000 representatives by the end of 2014. The North American economy’ s recovery and the subsequent generation of full-time jobs has put increasing pressure on Avon’s representative base, because Avon representatives are usually non-contractual workers. In April, The Wall Street Journal had reported that Avon might be contemplating the sale of its North American business. ^[5] However, nothing materialized post that, until now.

(Source: The Wall Street Journal)

Recent Management Change Announcement

In its Q3 2015 earnings call, Avon announced some management changes effective January 1, 2016. The current head of EMEA and Global field operations, John Higson, will also look after Latin America (EMEA and Latin America will be combined). Fernando Acosta, who currently heads Northern Latin America and Global Marketing, will be in charge of the brand marketing and innovation aspects, including the company’s move towards social selling. Avon’s Chef Financial Officer, Jim Scully will also assume the role of Chief Operating Officer. His responsibilities will include enterprise strategy, infrastructure, and global supply chain. ^[6]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Avon’s Press Release [↩]
2. Deal Gives Avon CEO Sheri McCoy a Chance to Revamp, The Wall Street Journal, Dec 17, 2015 [↩] [↩] [↩]
3. Avon Discusses Stake Sale With Private-Equity Firms, Fox Business, September 11, 2015 [↩]
4. Avon Products Rating Reports, The Street, September 13, 2015 [↩]
5. Avon exploring sale of North America business: WSJ, Reuters, April 14, 2015 [↩]
6. Avon’s Q3 2015 Earnings Transcript, Seeking Alpha, Nov 4, 2015 [↩]